Europe and US data divergence to pose questions for ECB and FOMC

19:00, 01 December 2015
· By Michael Hewson

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After yesterday’s disappointing US data and upbeat European economic data one could be forgiven for thinking that the central bank looking to ease should be the Federal Reserve, and the central bank looking to hike should be the European Central Bank. While I only jest the untimely divergence in some of the economic data could pose some significant questions for policymakers over the next couple of weeks. German unemployment at a record low of 6.3%, European manufacturing PMI’s at eighteen month highs, and if we get a further uptick in the latest EU inflation numbers this morning, expectations of a big bang extension to the ECB’s easing program tomorrow could well go the way of the fairies. The latest revision to November CPI is expected to see headline inflation pushed up to 0.2%, with core inflation set to remain unchanged at 1.1%. While recent rhetoric from ECB President Draghi has been exceedingly dovish it is becoming clear that a number of members on the governing council are uneasy at the prospect of further large scale measures in the face of an improving economy, and the likelihood that the drag factor of low oil prices will drop out of the inflation numbers early next year. It is this caution that appears to have prompted a rebound in the euro yesterday, in the process pulling the German DAX down from its four month highs. The latest US ISM manufacturing survey for November wasn’t particularly pleasant reading for Federal Reserve board members as they look ahead to their final meeting of 2015 in two weeks’ time, and a decision on whether to raise rates. The drop in the ISM headline number below 50 shouldn’t have been entirely unexpected given the weak Chicago reading the day before, but the fact that we hit the lowest level since June 2009 at 48.7 was unexpected. Not only that the sharp drop in a number of the other components of the index was equally as worrying, with prices paid dropping sharply to 35 and new orders also falling sharply below 50 as well. While it is important not to get too carried away with one number the weakness in the manufacturing sector shouldn’t really be all that surprising given the recent direction of travel, but the fact that activity has fallen back to levels last seen at the start of the initial QE program in 2009 could give cause for concern to some on the FOMC. Comments from various Fed speakers over the next few days are likely to be scrutinised closely with Fed Chair Janet Yellen due to speak later today, after remarks overnight from permanent member Lael Brainard which suggested that she expressed concern about the current strength of the US dollar, and implied that she might favour delaying the date of lift off given recent weakness. Tonight’s latest Fed Beige Book survey is likely to give additional pointers as to what is going on the US economy. In October a number of Fed districts cited concerns about the strong US dollar and the damage it was doing to manufacturing activity, and in light of recent data that clearly won’t have improved. While manufacturing only takes up a smaller percentage of the US economy given the weakness seen in the data thus far, this week’s services data really needs to outperform to pick up the slack, while this week’s jobs data equally needs to be as positive as previous months. We start with the latest ADP Employment report for November which has consistently lagged behind the BLS reports all year with expectations of a 191k, a slight improvement on the 182k seen in October. In the UK we also get the latest construction PMI, one part of the economy that continues to do well, though not as robust as it was in the middle of the summer. Expectations are for a slight decline to 58.4 from 58.8, with the biggest problem here being a shortage of available skills as the housebuilding sector strives to build new homes as quickly as possible. This is one area that is likely to remain positive in the UK economy, unfortunately despite the government’s best efforts, this is one area where a lack of headcount could hold the sector back. EURUSD – yesterday’s rebound off trend line support at 1.0550 has prompted a little bit of short covering with the March lows at 1.0460 also a key support. We need to get back through 1.0720 area to argue for a retest of the 1.0820 area. If we do manage to get back above 1.0830 we could see a run at the 1.0980 area. GBPUSD – this week’s rebound off major support near 1.4980 has prompted a little bit of a rebound, but we really need a move beyond the 1.5330 area to encourage the prospect of a move towards 1.5420. EURGBP – the 0.7080 level remains a key resistance level after finding some support just below the 0.7000 area. A move above 0.7080 argues for a rebound towards 0.7150. While below the 0.7080 area the risk remains for a move back to the July lows at 0.6935. USDJPY – currently finding support above the 122.20 area and resistance at the 124.00 area. Above the 124.00 area suggests the possibility of a move through to the August highs at 125.30. Only a move below the 121.80 area would delay the prospect of this scenario unfolding. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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